Merit Research Journal of Art, Social Science and Humanities Vol. 1(2) pp. 013-017, June, 2013 Available online http://www.meritresearchjournals.org/assh/index.htm Copyright © 2013 Merit Research Journals

Review

Environmental and : An approach to external business environment

Dr. Abhishek Gupta

Administrative-cum-Accounts Officer and Head of Office, Sardar Swaran Singh National Institute of Renewable Energy (Ministry of New and Renewable Energy, Govt. of India, Wadala Kalan, Kapurthala-144601 (Punjab) Email: [email protected]; Tel.: 01822-255090, 09592010278

Accepted June 18, 2013

Environmental , a term encompassing environmental planning, protection, monitoring, assessment, research, education, conservation and sustainable use of resources, is now accepted as a major guiding factor for sustainable development at the regional and national level. It is now being increasingly recognized that environmental factors and ecological imperatives must be in built to the total planning process if the long-term of making industrial development sustainable is to be achieved. Here we will try to define and discuss the role of Environmental Analysis in the process of organization. The present complex world require as far as is feasible, it consider impact of important factors related to organizations in strategic planning. The strategic planning of business includes all functional subdivisions and forwards them in a united direction. One of these subsystems is human resource management. Strategic human resource management comes after the strategic planning, and followed by strategic human resource planning as a major activity in all the industries. In strategic planning, it can use different analytical methods and techniques that one of them is PEST analysis. This paper introduces how to apply it in a new manner.

Keywords: Environmental management, Industrial development, Analysis, Business, Human resources, Industries, Pest analysis

INTRODUCTION

The PEST Analysis changes. Political changes might be expected to include, for instance, general changes in the domestic political The PEST analysis is the most common approach for climate, the effects of European integration and the after- considering the external business environment. PEST effects of the break-up of the Soviet Union, government analysis stands for Political, Economic, Social, and change, world power shifts, as well as specific legislation Technological analysis and describes a framework of and regulation. Economic changes is likely to include the macro-environmental factors used in the environmental effects of economic cycles, patterns of world trade, scanning component of strategic management but the currency conversion rate changes, commodity prices, word PEST is no more than a convenient mnemonic. The changes in capital markets, labour markets and rates, underlying thinking of the PEST analysis is that the and economic effects on suppliers and particular groups enterprise has to react to changes in its external of customers. Social change includes the effects of environment. This reflects the idea that requires demographic patterns, tastes and habits, and concerns a fit between capabilities and the external environment about the environment and sustainable development. and so it is necessary for an enterprise to react to Technological change covers the effects of technological 014 Merit Res. J. Art Soc. Sci. Humanit.

change on products, processes, and distribution short run with the idea that it will hurt competitors more, channels. The PEST analysis is very general in nature and in the long run, the initiating firm will gain some and this makes it difficult to give clear rules on how best advantage over the others. Rivalry is usually exhibited in to apply it in varying circumstances. Global or price wars, advertising barrages and product proliferation. geographically dispersed enterprises will have to conduct Rivalry is damaging to industry profitability because it is separate PEST analysis for different regions as trends costly. Businesses generally try to minimize rivalry within occur at different rates in different places. The value of the bounds of law; however, many factors can create or the PEST is likely to relate directly to the quality of the escalate rivalry in an industry and they should be effort put into it. This time spent thinking about how carefully monitored as part of the environmental analysis external change will affect the enterprise and its industry process. As rivalry increases, average profitability is is likely to be well spent. pushed down, all other things being equal. Rivalry is greater when there are many small firms in an industry or when there is no clearly dominant firm to set and enforce Industry analysis: A market assessment tool standards for competition. Economies of scale exist for current competitors in the An industry is a collection of firms offering goods or industry. New entrants must incur the capita’ costs of services that are close substitutes of each other. large production facilities to keep their unit costs down Alternatively, an industry consists of firms that directly and maintain competitive prices, or they may forego the compete with each other. In other words an industry is a large employees to, management must consider other group of firms producing a similar product or service, staffing alternatives. Absolute cost advantages exist such as soft drinks or financial services. An examination when current competitors have lower costs. This may be of the important stakeholder groups, such as suppliers due to patents, favourable long-term supply contracts, or and customers, in a particular corporation’s task experience in operations. Brand loyalty and product environment is a part of industry analysis. An authority on differentiation are present in the industry. Users view the competitive strategy contends that a corporation is most product/service as unique and are fewer prices sensitive. concerned with the intensity of competition within its This makes it difficult for new competitors to establish a industry. There are five forces, which work together to market position. Government regulations limit new determine the type and direction of pressures on competitors. Start-up costs are high. Current competitors profitability that will be found in a given industry. When move to make it difficult for new entrants to establish these forces of competition are favourable, there will be themselves. This may be done by cutting prices in less downward pressure on profitability, and the industry markets where new products are being tested as long as should have a higher average level of profitability. When such pricing is not predatory. the structural factors are unfavourable, there will be more It should be rioted that entry barriers are most downward pressure on profitability and a correspondingly effective against start-ups. The only entry barrier, which lower average level of profitability. A company, which is seems to be consistently effective against entry by competing in an industry with an unfavourable structure, acquisition, is the reaction of existing competitors. must find a, ways to gain an advantage over its Substitute products: Industry sales and profitability are competitors, which will allow it to earn above average limited by what the customer will pay for a given level of level of profitability. If no can be quality or service when alternatives are available. developed, it may be possible to change the structure of Commercial banking companies often switch from high- the industry. If changing the structure is not a viable fructose corn sweeteners to sugar when the price of alternative, the company should consider exiting the sugar decreases and switch back when the price of sugar industry. A company, which is operating in an industry increases. As a result profits in the high-fructose corn with a favourable structure, should work to maintain the syrup industry are limited by the price of sugar. When structure. there is a strong threat of substitution, average profitability can suffer. The threat of substitution holds down industry profits by allowing buyers options. The Industrial rivalry threat of substitution is greater when switching costs are not significant. Substitutes provide about the same value The force of competition reflects the interactions among for cost. Buyers are in the habit of substituting. competitors who produce products or services that are close substitutes for each other. These competitors are collectively known as the industry. An industry, which is Industries: Global competition characterized by firms trying to edge out each other for market share is said to be experiencing rivalry. Rivalry is Over time most industries evolve through a series of more intense than ordinary competition. Firms take stages form growth through maturity to eventual de- actions, which may damage their own profitability in the cline. The strength of each of six forces mentioned earlier Gupta 015

varies according to the stage of the industry evolution. strategic management because it produces much of the The industry life cycle is useful for explaining and information, which is, requires to assess the outlook for predicting trends among the six forces driving industry the future. The environment is a significant source of competition. For example, when an industry is new, change. Some organizations become victims of change, people often buy the product regardless of price because while others use change to their advantage. it fulfils a unique need. This is probably a fragmented Organizations are more likely to be able to turn change to industry no firm has large market share and each firm their advantage if they are forewarned. This is a major serves only a small piece of the total market in purpose of the environmental analysis process. competition with others. As new competitors enter the In order to perform an environmental analysis industry, prices drop as a result of competition. efficiently and effectively, a manager must thoroughly Companies use the experience curve and economies of understand how organizational environments are scale to reduce costs faster than the competition. structured. The environmental analysis phase of the Companies integrate to reduce costs even further by strategic management process seeks to uncover relevant acquiring their suppliers and distributors. Competitors try information rather than extensive information; it rewards to differentiate their products from one another in order to the pursuit of quality rather than quantity. Furthermore, avoid the fierce price competition common to a maturing the process must be future-oriented to provide for industry. By the time an industry enters maturity, products adequate response time, whether the desired response is tend to become more like commodities. This is now a to capitalize on a trend or to influence its direction. consolidated industry dominated by a few large firms, Finally, the information must be translated into a form that each of which struggles to differentiate its products from facilitates its use in strategic planning. From these the competition. As buyers become more sophisticated requirements, environmental analysis can be divided into over time, purchasing decisions are based on better three major steps determining the bounds and relevant information. Price becomes a dominant concern, given a sectors of the environment; Scanning and forecasting minimum level of quality and features. As an industry and ensuring that information is available concerning the moves through maturity toward possible decline, its defined environment, interpreting packaging information products growth rate of sales slows and may even begin into forms that are useful for Planning. Every organization to decrease. To the extent that exit barriers are low, firms is subject to general trends which are felt in many will begin converting their facilities to alternate uses or industries and which are not usually amenable to will sell them to another firm. The industry tends to influence by a single organization. These trends can be consolidate around fewer but larger competitors. classified as technological, economic, social, and political Global industries, in contrast, operate worldwide, with according to the sector of the environment from which MNCs making only small adjustments for country specific they come. The force of trends varies with the circumstances. A global industry is one in which all geographical scope of competition, so it is helpful to MNC’s activities in one country are significantly affected identify the scope of the sector, which requires scanning. by its activities in other countries. MNC’s produce products or services in various locations throughout the world and sell them, making only minor adjustments for The general environment specific country requirements. Examples of global industries are commercial aircraft, television sets, The components normally considered part of the general semiconductors, copiers; automobiles, watches and tires, environment are Economic, Technological, Social and the largest industrial corporations in the worked in terms Political. The fluctuations of local, national, and world of dollar sales are, for the most part, multinational economies are related in many ways, but it is still corporations operating in global industries. The factors important to make separate assessments based on that tend to determine whether an industry will be organizational scope. Local conditions can moderate or primarily multi-domestic or primarily global are pressure deepen the effects of national economic trends. The for coordination within the multinational corporations underdeveloped nations are characterized by rising operating in that industry, pressure for local populations, low standards of education, and lack of a responsiveness on the part of individual country markets. transportation and commercial base. In the developing nations, gross national product is rapidly increasing, but wages are low and consumer goods scarce. Most critical is the unevenness of income and wealth, the rapidity of Environment analysis: Threats and opportunities change, and the political instability, which can threaten organizations operating in such areas. Technology refers Environment analysis is the study of the organizational to the means chosen to do useful work. Technological environment to pinpoint environmental factors that can trends include not only the glamorous invention that significantly influence organizational operations. revolutionizes our lives, but also the gradual pain- Environmental analysis is a critical component of staking improvements in methods, materials, in design, in 016 Merit Res. J. Art Soc. Sci. Humanit.

application, in diffusion into new industries and in nization activities. This allows each subsidiary to closely efficiency. It includes hardware, software and live ware. monitor the local market condition it faces and the For centuries, the simple process of handling business freedom to respond competitively. A high coordination correspondence has involved dictation, transcription, and and geographical concentration of the multinational’s final review and signature. Technological improvements, activities results from choosing a pure global strategy. which made the process more efficient, include the Although some activities, such as after-sales service, creation of a standardized shorthand writing system, the may need to be located in each market, the activities invention of the typewriter, the use of voice recording need to be tightly controlled so that standardized machines for dictation, and the use of the microcomputer performance occurs worldwide. for transcription and editing. All four represent Domestically, the public image is often shaped from a technological change even though only the typing, marketing viewpoint. The firm’s public image is recording, and word processing activities involve considered a marketing tool that is managed with the machines. objective of customer acceptance of the firm’s product in The behavior patterns of individuals and groups reflect the market. Although this dimension remains a critical their attitudes, beliefs and values. The social environment consideration in the multinational environment, it must be includes the attitudes and values of society as well as the properly balanced with concern for organizational behavior, which is motivated, by those values. A claimants other than the customer. The multinational firm community’ attitudes toward legalized gambling, the is a major user of national resources and a major force in composition of families and households, and the the socialization processes of many countries. Thus, the preference for fast food over home cooking are all MNC must manage its image with respect to this larger manifestations of the social environment. The impact of context by clearly conveying its intentions to recognize the social sector is felt in changing needs, tastes and the additional internal and external claimants resulting preferences of consumers, in relations with employees, from multi-nationalization. and in the expectations of society about how the organization should fulfill its citizenship role. The political sector of the environment presents actual and potential Environmental forecasting restrictions on the way an organization operates. These restrictions can take the form of laws which require or Environmental scanning, monitoring, and competitive prohibit certain actions, regulations which interpret and intelligence are important inputs for analyzing the detail laws, or avenues for reporting relationships and external environment. However, they are of little use oversight functions. The differences among local, unless they provide raw material that is reliable enough to national, and international subsectors of the political help managers make accurate forecasts. Environmental environment are often quite dramatic. forecasting involves the development of plausible projections about the direction, scope, speed, and intensity of environmental change, its purpose is to Worldwide/Global environment: An international predict change. No one can deny that economic, perspective to global industry technological, political, and social change is a part of organizational life. To say the least, forecasting is a most Although industries can be characterized by the global difficult process. At this point it may be consoling to recall multi-domestic distinction, few pure cases of either exist. some humorous forecasting rules. Several studies have Thus, a multinational competing in a global industry must, examined the impact of environmental analysis and to some degree, also be responsive to local market forecasting on organizational performance. One study condition. Similarly, the multinational firm, competing in a found that increased knowledge, through environmental multi-domestic industry cannot totally ignore opportunities analysis and forecasting was positively correlated to to utilize intra-corporate resources in competitive profitability. positioning. The question then becomes one of deciding, Brainstorming is a technique that is primarily used to which corporate functional activities should be performed produce creative ideas for solving problems, but it can where and what degree of coordination should exist also-be-used in forecasting. Basically, brainstorming between them. A multinational corporation has a wide involves presenting a particular subject to a group of range of possible location options for each of these people and allowing them to present their forecasts on activities and must decide which set of activities will be the subject. Brainstorming generally consists of three performed in how many and which locations. The basic phases. In phase one, members of the group are asked international derive from considering the to present spontaneously their ideas on the future of the location and coordination dimensions. If the firm is subject under study. The group is told that producing a operating in a multi-domestic industry, choosing a large quantity of their ideas is desired, and that they country-centered strategy implies low coordination of should not be concerned about the quality of their ideas. functional activities and geographical dispersion of orga- Basic rules are observed in the first phase. No criticism of Gupta 017

forecasts is allowed. No praise of forecasts is allowed. No Rather it postulates possible future scenarios without questions or discussion of forecasts is allowed. making any assessment of the likelihood that any one Combination and improvements of forecasts that have scenario will occur. was pioneered in been presented are encouraged. During the second Shell. Scenario planning involves the creation of a phase, the merits of each forecast are reviewed, which number typically two to four complete scenarios of the often leads to additional alternatives. Alternatives with future, each of which is self-consistent but significantly little merit are eliminated in this phase. In the third phase, different form the others. Under scenario planning, the one of the alternatives is selected, normally through purpose of the strategy process is to help managers to group consensus. develop better mental models so that they can deal with Trend-impact analysis is also used in environmental change as it occurs. It turns planning into learning forecasting and is conducted along the following general exercises and places the emphasis on the process of steps. Past history of a particular phenomenon is planning rather than the resulting plans. It is therefore extrapolated with the help of a computer. Panel of reason of the Learning and Cognitive schools. Scenario experts specifies a set of unique future events, which planning is being used to an increasing extent, but it does could have a bearing on the phenomenon under study. require considerable time and effect to achieve the best Panel of experts indicates how the trend extrapolation results. would be affected by the occurrence of each of these events. Computer then modifies the trend extrapolation using these judgments. Panel of experts then reviews, CONCLUSION the adjusted extrapolation, and modifies the inputs. The PEST analysis is a useful tool for understanding market growth or decline, and as such the position, Environmental uncertainty: A threat to strategic potential and direction for a business. A PEST analysis is manager a business measurement tool. This research dealt about the important PEST analysis which is very essential for Environmental uncertainty is the degree of complexity strategic management. Apart from this analysis the plus the degree of change existing in an organization’s industry analysis, types of industries, the different kinds external environment. Environmental uncertainty is a of strategies to be adopted in the industries and the threat to strategic managers because it hampers their strategy alternatives are also discussed. After going ability to develop long-range plans and to make strategic through this lesson we may understand the decisions to keep the corporation in equilibrium with its Environmental analysis, global environmental external environment. Most industries today are facing an dimensions, environmental forecasting, risk and ever increasing level of environmental uncertainty. They uncertainty in business strategic management. are becoming more complex and more dynamic. Industries that used to be multi-domestic are becoming global. New flexible, aggressive, innovative, competitors REFERENCES are moving into established markets to rapidly erode the Frederic PM, Agnes FV, John MB (2011). Pest Analysis, VDM advantages of large previously dominant firms. Publishing, 27-Feb-60 pages. Distribution channels vary from country to country and Donald AD, Shari LB, Gershon JS (2001). 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